Economics at your fingertips  

Risk-shifting, equity risk, and the distress puzzle

Keming Li, Jimmy Lockwood () and Hong Miao

Journal of Corporate Finance, 2017, vol. 44, issue C, 275-288

Abstract: Higher default probabilities are associated with lower future stock returns. The anomaly cannot be explained by strategic shareholder actions, traditional risk factors, characteristics, or mispricing, but, instead, is consistent with a risk-shifting hypothesis. Consistent with the risk-shifting hypothesis, we find that distressed firms tend to overinvest, destroy value, and exhaust their cash flows. Effects are concentrated in firms with wide credit spreads, firms with no convertible debt, and in cases where CEOs receive above-average equity-based compensation. As default risk rises, credit spreads rise, equity betas fall, and equity returns fall.

Keywords: Financial distress; Bankruptcy; Risk-shifting; Credit spreads (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this article

Journal of Corporate Finance is currently edited by A. Poulsen and J. Netter

More articles in Journal of Corporate Finance from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

Page updated 2019-03-31
Handle: RePEc:eee:corfin:v:44:y:2017:i:c:p:275-288